Top 5 strategies to improve your e-commerce gross margin

Maximising profitability is fundamental for long-term e-commerce success. One of the most effective ways to achieve this is by optimising your gross margins, which directly impact your bottom line.

We explore five of our top strategies that e-commerce businesses can implement to improve their contribution margins and drive sustainable growth.

Fundamental to all of this is clean, structured data, the right processes and integrated technology.

From reducing return rates and optimising direct costs to streamlining inventory management and expanding into profitable markets, we dive into actionable tactics that can improve your gross margin. By implementing these strategies, you'll be better informed to make relevant changes to improve your gross margin.

Reduce returns rate
Unit economics reporting
Reduce cost of goods
Enhance product mix
Improve inventory management
Optimise geographical mix

1. Reduce returns rate

💪 Medium effort

🏆 High reward

Returns are a significant drain on profitability for e-commerce businesses. Not only do they incur direct costs for acquiring the customer click, processing and restocking, but they also result in lost revenue and potential customer dissatisfaction. By addressing the root causes of returns, you can minimise these occurrences and boost your contribution margin.

The impact

Lowering returns helps save on operational expenses and makes sure more sales convert into actual revenue. Reducing returns leads to better inventory management and can enhance customer trust and loyalty, further driving profitability. Lowering return rates can also positively impact customer lifetime value and reduce fulfilment and logistics expenses

How to go about it

Analyse return data: Gather data across systems to track return reasons, product details, customer info and frequencies, identifying patterns and using analytics to continuously reduce return rates.
Improve product information: Provide detailed product descriptions, high-quality visuals from multiple angles, and videos to set accurate expectations on size, materials and usage.
Enhance sizing and fit guidance: Offer comprehensive sizing guidance like charts, fit advice with customer feedback, and consider virtual try-on technologies like AR or 3D modelling.
Simplify return policies: Simplify return processes while educating customers on usage and alternatives, balancing customer satisfaction by avoiding overly strict policies but using restocking fees to discourage unnecessary returns.

Expected results

Implementing these strategies can lead to a significant reduction in return rates, resulting in lower costs associated with returns processing, higher customer satisfaction, and better gross margins. Track return rates, customer feedback, and financial impacts to measure success

Action steps

Start by making sure you’re tracking returns by reason. Analyse your current returns data to identify the most common reasons for returns. Use these insights to target your initial efforts and make data-driven improvements to your product descriptions, sizing guides, and quality control processes.

2. Report on unit economics to optimise direct costs

💪 Medium effort

🏆 High reward

Understanding your unit economics and having clear visibility into direct costs is crucial for optimising profitability in e-commerce businesses. By breaking down costs at a granular level and making data-driven decisions, you can identify opportunities to negotiate better terms, switch suppliers, or explore alternative solutions that enhance your contribution margin.

The impact

Detailed reporting on unit economics, including direct costs such as outbound logistics and transaction fees, allows for precise cost management and informed decision-making. Reducing these costs directly improves gross margins and overall profits. Granular cost visibility also enables more accurate pricing strategies, enhancing competitiveness and driving higher sales volumes.

How to go about it

Implement unit economics: Define key direct cost metrics to track in your finance system, and develop reports breaking down unit costs per sale, product or order.
Analyse cost drivers: Use unit economics reports to pinpoint significant cost drivers like weight or distance, and analyse costs segmented by product, geography or other factors to identify opportunities.
Negotiate with suppliers and partners: Leverage unit cost data and sales volumes to negotiate better supplier terms, while exploring alternatives like new logistics or payment providers for better rates.
Continuous monitoring and optimisation: Continuously monitor unit economics to track direct cost changes over time, assess margin impacts, and adjust pricing strategies based on unit costs to maximise profitability.

Expected results

By implementing unit economics reporting to better understand what each sale costs at a granular level, and secondly optimising direct costs, you can expect to improve your gross margin. Track any changes and measure their impact on gross margins and overall financial performance.

Action steps

Start by defining the key direct cost components to clearly track in your finance system and implement unit economics reporting. Monitor this on an ongoing basis to understand fluctuations and continually seek to reduce these by category and/or supplier.

3. Reduce cost of goods sold (CoGS)

💪 Medium effort

🏆 High reward

Focusing on reducing cost of goods sold (CoGS) is a big proponent for e-commerce businesses looking to boost their gross margins. By lowering the expenses directly tied to producing or purchasing the goods sold, you can increase gross margin (and profit) without changing your sales volume. This can involve negotiating better terms with suppliers, finding cost-effective materials, or optimising production processes.

The impact

Reducing CoGS has a direct impact on gross margins by decreasing the expenses incurred to produce or purchase products. Lower CoGS allows for higher profitability and can enable more competitive pricing or increased margins. Additionally, reducing CoGS can positively impact cash flow and working capital, as it lowers the cost of inventory carried on the balance sheet.

How to go about it

Negotiate with suppliers: Review and renegotiate supplier contracts for better pricing and terms, while consolidating purchases to leverage bulk discounts and strengthen your negotiating position.
Alternative sourcing: Research and consider alternative suppliers that offer similar quality at lower costs, including evaluating sourcing from regions with lower production costs while factoring in logistics and quality.
Review packaging: Assess packaging materials and processes to find cost-saving opportunities without compromising product protection or customer experience, exploring sustainable packaging options that may offer cost savings.

Expected results

Implementing these strategies can lead to a significant reduction in CoGS, translating directly to improved gross margins. This allows you to either maintain competitive pricing while improving profitability or gain pricing flexibility. Track CoGS percentage relative to revenue to measure the effectiveness of your efforts.

Action steps

Start by conducting a comprehensive audit of your current CoGS to identify the highest cost areas. Use this analysis to target specific suppliers, materials, or processes for cost reduction initiatives. Prioritise areas with the most significant potential impact on gross margins.

4. Enhance product mix

💪 Medium effort

🏆 Medium reward

Optimising your product mix involves focusing on the products that generate the highest margins. By emphasising high-margin items and potentially phasing out or improving low-margin products, you can significantly boost your overall profitability. However, this strategy requires a detailed understanding of product performance and customer preferences.

The impact

Enhancing your product mix directly influences gross margins by prioritising selling high-margin products. A well-optimised product mix can also improve inventory turnover and reduce holding costs. A focused product mix can also streamline operations, reduce complexity, and lower overall operational costs.

How to go about it

Profitability analysis: Calculate product-level gross margins factoring in all direct costs.
Customer preference research: Regularly review sales data and gather customer feedback to understand popular products and preferences.
Product lifecycle management: Continuously introduce new high-margin products aligning with customer needs, while phasing out low-margin or declining products.
Focus on core products: Identify your core, high-margin products and concentrate resources on improving, marketing and promoting them.

Expected results

An optimised product mix leads to higher average gross margins and better alignment with market demand. It also improves inventory efficiency and reduces the risks associated with holding low-margin or unsold stock. Measure success by tracking the changes in your gross margin percentage and the performance of promoted products.

Action steps

Begin by conducting a profitability analysis of your current product range. Use this data to identify high-margin products to focus on and low-margin items to reevaluate or phase out.

5. Improve inventory management

💪 Medium effort

🏆 Medium reward

Effective inventory management is crucial for reducing costs associated with excess stock or stockouts. By making sure you have the right products in the right quantities at the right time, you can improve cash flow, reduce holding costs, and improve customer satisfaction.

The impact

Better inventory management helps lower storage and handling costs, prevent stockouts, and align supply with demand more efficiently. This not only reduces operational costs but also improves sales and customer satisfaction by maintaining optimal inventory levels and availability. It will also have a positive impact on working capital and cash flow, as it minimizes the capital tied up in excess inventory.

How to go about it

Implement Just-In-Time (JIT) practices: Minimise excess stock and holding costs, requiring precise demand forecasting and close supplier coordination.
Analyse inventory turnover ratios: Regularly monitor inventory turnover ratios to identify slow-moving items and adjust purchasing strategies to optimise stock levels accordingly.
Demand forecasting: Leverage predictive analytics on historical sales data to accurately forecast demand, accounting for seasonality, trends, and promotions. Establish reorder points based on these and lead times to prevent stockouts.
Regular inventory audits: Conduct frequent physical audits using inventory management software to maintain real-time accuracy and address discrepancies promptly.

Expected results

Improved inventory management leads to lower storage costs, reduced risk of obsolescence, and better cash flow. It makes sure that products are available to meet customer demand without tying up excessive capital in stock. Track inventory turnover rates, holding costs, stockout incidents, and inventory accuracy to gauge the success of your improvements.

Action steps

Start by integrating an inventory management system that provides real-time tracking and forecasting capabilities. This will help you maintain optimal inventory levels and improve overall efficiency. Conduct a thorough analysis of your current inventory practices, turnover rates, and demand patterns to identify areas for improvement.

Bonus: Optimise geographical mix

💪 Medium effort

🏆 Medium reward

Optimising your geographical mix can really help improve overall gross margin in e-commerce. This involves understanding where your highest gross profit margins originate from across different regions and focusing on these.

The impact

Optimising your geographical mix allows you to concentrate efforts on the most profitable regions, boosting overall gross margins. It also provides opportunities to diversify revenue streams and mitigate risks associated with overdependence on a single market. This strategy can leverage regional advantages, such as lower operational costs or higher pricing potential.

How to go about it

Analyse regional profitability: Conduct a detailed analysis of gross profit margins across different geographical regions, factoring in revenue, direct costs, and operational expenses.
Prioritise high-margin regions: Based on the analysis, concentrate resources and initiatives in the regions contributing the highest gross profit margins.
Adapt marketing and operations: Tailor marketing strategies, product content, and operational approaches to align with regional preferences, trends, and cultural nuances.
Optimise regional strategies: Review distribution channels, pricing strategies, and partnerships to make sure efficient and cost-effective operations in each targeted region.

Expected results

Optimising your geographical mix allows you to maximise profitability by focusing on high-margin regions and strategically expanding into new profitable markets. It diversifies revenue streams, mitigates risks, and enhances overall business resilience. Measure success by tracking gross profit margins, sales growth, and market share across different regions.

Action steps

Begin by conducting a comprehensive analysis of gross profit margins across your current geographical regions. Use these insights to prioritize resource allocation and initiatives in the most profitable areas. Then, conduct market research to identify new regions with high profitability potential, and develop targeted expansion plans tailored to regional dynamics.